Managing Payroll and Benefits
MCC Resource for Treasurers of Our Local Churches US Edition
Table of Contents
Managing Payroll And Benefits ……………………………………………………… 002
Clergy Options …………………………………………………………. 002
Employee Versus Self Employed ……………………002
Housing Allowance ……………………………002
Annual Resolution ……………………..003
Expense Allowance……………………………003
Determining What Is Taxable …………003
Determining Withholding ………………………003
Wages Versus Housing ……….003
Retirement Elections ……………004
Expense Allowances And Reimbursements ……………….. 004
Reserving Money To Fund Payouts Of Paid Time Off ………005
Trinet And Other Payroll Services …………………………….. 006
Managing Payroll Internally ……………………………………..007
Time Reporting …………………………………..009
Paid Time Off (PTO) Tracking …………………009
Preparing PayrollChecks ………………………010
Reporting Payroll To The US Internal Revenue Service(IRS)011
Quarterly Submission Of Withholding To IRS ..011
Annual Submission Of IRS FormW-3 …………011
Annual Preparation Of IRS Form W-2 …………012
Recording SalaryHousing Allowance
Annual Submission Of Form 1099MISC
Annual Submission Of Form1099INT ……..014
Annual Submission Of Form 1096 ………….015
Unemployment Compensation ………………………………..020
What Is UnemploymentCompensation? …….020
Mandatory Participation ………………………..020
Optional Participation …………………………..020
Reporting Requirements ……………………….020
Paying Unemployment …………………………020
References and Resources ……………………………………………………………021
Forms …………………………………………………………………………………….022
MANAGING PAYROLL AND BENEFITS
To accurately complete the necessary work in managing payrolls and benefits, a Treasurer or bookkeeper must understand what the clergy personnel have done in the past and communicate with the clergy periodically on any changes they would like to make going forward.
The Clergy
The first decision point in managing payroll and benefits should be determined by the clergy. They must decide if they want to be paid as an employee or if they want to be paid as an independent contractor (that is, identify as self-employed). SeeIndependent Contractor or Employee.
For the purposes of FICA and Medicare taxes, the Internal Revenue Service lists all clergy as self-employed. That means the entirety of their income is subject to these taxes. SeeIRS Minister Audit Technique Guide
Clergy personnel can decide, however, whether to have federal withholding income taxes withheld in order to cover the FICA and Medicaretaxes and any income tax liability they may owe at the end of the year.
Housing Allowance
If a church does not provide a residence for its clergy to live in, one tax allowance that clergy may receive is ahousing allowance. Clergy receive this by electing to have a portion of their salary designated as a housing allowance. The amount of the housing allowance is excluded from the clergy’s gross income. The amount for the housing allowance must be decided upon by the clergy person and approved in a resolution passed by the Board of Directors. If the resolution is to be effective Jan. 1st of the year it must be resolved by Dec. 31st of the previous year. However, if it is not resolved by December 31st then the effective date will be the date the Board of Directors passed the resolution. It is not permissible for a resolution to be deemed retroactive.
If there is no change in the amount of a housing allowance, a new resolution does not have to be made annually.
Sample Housing Allowance Motion –
Whereas, Section 107 of the Internal Revenue Code permits a minister of the gospel to exclude from gross income (in computing federal income taxes) a church-designated allowance paid to him or her as part of his or her compensation to the extent used for actual expenses in owning or renting a home; and
Whereas, the following personnel is compensated by (name of specific MCC) Church exclusively for services as a minister of the gospel and the Church; and
Whereas, the Church does not provide parsonages to the following minister; therefore it is hereby
Resolved, that the total compensation paid in Year to the following minister shall include housing allowances as indicated pursuant to section 107 of the Internal Revenue Code; and it is further
Resolved that the designation of the following housing allowance shall apply to the calendar year XXXX from 1 Jan XXXX and all future years unless otherwise provided.
Expense Allowances
Based on IRS standards, all of a clergy’s income is taxable unless explicitly stated as not being so in the IRS Code. Clergy may have other allowances which they may deduct like moving expenses. Publication 521 spells out what is taxable and what is not taxable. If a clergy requests payroll deduction, IRS Circular E / Publication 15 is to be used to determine the appropriate amount to be deducted from the individual’s payroll for federal income tax, FICA and Medicare.
Housing Allowance Deduction
As previously stated Federal income tax, FICA and Medicare Tax apply to the portion of the clergy’s salary which is considered wages. FICA and Medicare Tax are applied to the portion that is considered the housing allowance. However, there is a provision for clergy to become exempt from paying FICA and Medicare taxes. It is advisable that the Clergy person speak to their accountant or lawyer concerning this tax decision.
Retirement Election And Deduction
A clergy person may be eligible to contribute into the UFMCC Retirement Fund by completing the Board of Pensions Election Form and making an annual payment, currently (2011) in the amount of $130. The Church is required to make quarterly payments to the Retirement Fund by filing the Quarterly Board of Pensions Transmittal Form.
Expense Allowances And Reimbursements
If a church has decided to reimburse the clergy person for expenses, the Board of Directors will need to formulate and approve a reimbursement policy, if none already exist. Proper reimbursement from an allowance account or from direct expenses should contain the following information:
Date of the expense was incurred
To whom the expense was paid
How the expense was paid
Why the expense was incurred
Who else was present when the expense was incurred, if the expense is for food or entertainment
See Sample Reimbursement Form
RESERVING MONEY TO FUND PAYOUTS OF PAID TIME OFF
It is recommended that a Reserve Fund Accountbe setup to hold funds in order to cover accrued paid time off, This must be posted as a liability on the accrual based financial statement. It is also recommended that a church keep on hand at least one (1) month of expenses as a cash balance in accounts for cash flow purposes.
HUMAN RESOURCE OUTSOURCING VERSUS MAINTAINING INTERNAL PAYROLL FUNCTIONS
Outsourcing or subcontracting responsibility for completing certain business functions has become a fact of church life for a number of years. Traditionally, churches have outsourced individual corporate functions, such as benefit administration or payroll processing.
The reason churches are moving to Human Resource Outsourcing (HRO) is the sheer amount of time consumed in performing functions like payroll processing and governmental reporting.
Traditional, niche-oriented HRO service providers (such as payroll service bureaus) are realizing that they must expand their service offerings to remain competitive. Outsourcing a single function is rapidly moving toward outsourcing numerous processes. A single source provider that can deliver solutions across multiple resource functions can service the client better and cheaper than several single service providers.
HROs are ideal for medium to large churches that are looking for ways to reduce costs without losing the direct employee/employer relationship. Access to better technology at reduced costs is another reason churches may consider HRO’s. Functions outsourced to HRO service providers vary depending on need. Most HROs allow flexible combinations of their product and service offerings to meet individual church needs.
HROs may offer: self-service or supported Human Resource and payroll related technology, employee education and training, benefits management and administration, payroll services, etc.
MCC HQ uses Trinet ( but numerous other companies exist. A good resource for HRO’s is
MANAGING PAYROLL INTERNALLY
Dealing with the complexity of managing payroll and payroll taxes can be time consuming and confusing. State, federal, and local requirements change frequently and are difficult for the average church Treasurer and/ or Office Manager to stay on top of, and mistakes can be incredibly frustrating for employees and could create legal issues for the church itself.
For tax purposes, the Treasurer and / or Pastor must determine how each staff member is classified, as employee or independent contractor. Employees are subject to payroll taxes, while independent contractors bear responsibility for their own taxes. To determine the difference, the IRS uses the following criteria:
- Behavioral Test.A worker is an employee when the employer has the right to, in large part, direct and control the worker.
- Financial Test.The financial test evaluates the degree of control the worker maintains over financial aspects of a job, including whether or not expenses are reimbursable and how the worker is paid. Plus, typically independent contractors are not formally tied to one particular business and can advertise services and seek other work opportunities.
- Relationship Test.The relationship test primarily focuses on the length of time a work engagement will last. If a worker has been contracted to work until a certain date or until the end of a particular project, he or she is usually considered an independent contractor. If the work engagement does not have time or project boundaries, the worker is generally considered an employee.
Independent contractors, usually only the Senior Pastor, are paid a fee and are responsible for taking care of tax withholding, reporting, and deposits. The management of employee payroll taxes is handled by the employer, the church.
In either case, records must be stored for at least three years (some states have different requirements), for example: time and attendance records; records of earnings, deductions, taxes paid, etc; salary and wage schedules; and additional items like order, shipping, and billing records. Churches are also required to comply with regulations regarding Workers CompensationPlans, the Family Medical Leave Act (FMLA),short- and long-term disability, etc.
After determining the proper amount exempted and the proper amount owed, reporting and depositing payroll taxes to the appropriate agencies is then required. Deposits made late – or not made at all – can incur stiff legal penalties and costly interest charges.
Here's a quick breakdown of the taxes and deductions a church is responsible for collecting and depositing:
- Federal Taxes. Federalincome taxmust be withheld each pay period from employee pay, and the employer is responsible for paying a matching amount.One of two basic tax tables is used: Wage bracket tablesor percentage tables. The employer is responsible for determining which table to use.
- State Taxes.Most states also use tax tables; a few, like Alaska, Florida, Texas, New Hampshire, Wyoming, Washington and Tennessee, do not require state income tax. Other states like Arizona tax as a percentage of the federal tax, while a few others, like Pennsylvania, tax based on a fixed percentage of total wages. Consult the appropriate state’s taxing authority for the requirements that particular state.
- FICA.FICA includes Social Securityand Medicare taxes; the employer and employee split the tax responsibility. People who are self-employed pay the entire amount. That tax is often called the self-employment tax.
- FUTA.Churches are not liable for FUTA (see IRS Publication 1828):
If this sounds involved, it can be. Regardless of the complexity and time involved, churches are required to handle payroll and deposit withholdings in some fashion.
A church’s payroll can be maintained in-house by either using a manual bookkeeping system or through payroll and accounting software. The advantage is that total control is maintained by the church and the cost of managing payroll (assuming a skilled administrator is in charge of the process) is usually relatively low. The disadvantage is that finding a knowledgeable employment and payroll specialist can be difficult and mistakes can be extremely costly. Tight internal controls are also necessary to ensure the chance of embezzlement is minimized.
Another option to maintaining the payroll function in house is using a Certified Public Accountant. If the church uses a CPA firm for other bookkeeping and accounting duties, adding payroll responsibility could make sense. Having a CPA take over a church’s payroll function could pay dividends since they are already familiar with the organization and its way of doing business. A CPA could find ways to cut costs or take advantage of different tax and general business opportunities. The downside to engaging a certified public accountant is the cost is oftentimes higher than maintaining payroll totally in-house.
The other option, discussed above, is hiring an HRO. The advantage of an HRO is one-stop shopping: the HRO service takes care of all payroll functions, from adding a new employee to payroll to handling the financial ramifications associated with a terminated employee. The disadvantage is that costs can be high for multiple-employee organizations, as transactions are usually billed on an “a la carte” basis—add a new employee, pay a fee for the service. Also, because the service operates at a site removed from the business location, complex or unusual situations may require time and effort to overcome and can create frustration.
The best option to use depends on a church’s specific circumstances. Regardless of whether a particular church uses an outside payroll processing firm or prepares payrolls internally, it is important that the Treasurer ensure that all paid church staff maintain and accurately record their hours of work and all instances when leave is taken.
Time Reporting
An established workweek consists of seven consecutive days and this workweek should be consistently followed throughout the year. Most churches prefer using a Monday through Sunday workweek, but any seven day period is permissible under Federal and State labor laws. Non-exempt workers are typically entitled under state and federal labor laws to be paid time and one half of their regular rate of pay for hours worked over 40 in a workweek. Some state and localities may require a daily overtime premium be paid. The Treasurer should ensure that the church complies with required labor laws and regulations. As such, paid church staff should accurately record hours of work and leave taken on a workweek basis. Most churches use an established time sheet for these purposes. The time sheets must be completed and signed by the employee and then submitted for concurrence by the appropriate supervisor, or in the Pastor’s case, by the Vice /Moderator of the Board. These time sheets will be the basis for processing payroll for that specified time period.
Paid Time Off Tracking
Many churches offer paid time off (PTO) in the form of holidays, sick leave, vacation and/or personal days. The Treasurer should ensure that a system is in place to properly record the accrual and receipt of PTO benefits for each employee. In instances where vacation or leave benefits are earned but not used within the work calendar year or previously specified time period, it is very important that the church have an established PTO policy as to the amount of leave that may be “banked” (carried over to new time period) before it is forfeited. The same is true if the church offers credit or compensatory time. Paid time off should be requested through a submission of a PTO Request Form.
Preparing Payroll Checks
Paychecks, when processed manually by the church, should follow the same procedures as other church-issued checks. The confidentiality of the information contained on payroll checks and pay stubs must be maintained by Board members. Payrolls processed by outside payroll entities and delivered to the church by mail should be distributed by the person designated in accordance with the church’s Financial Operating Policy (usually the Pastor, Executive Pastor or Treasurer).
REPORTING PAYROLL TO THE U.S. INTERNAL REVENUE SERVICE
Quarterly Submissions
Quarterly submission of an actual amount of payroll withholding to the IRS is reported on Form 941 “Employer’s Quarterly Federal Tax Return”—and is due the last day of the month following the closing of the quarter.
Churches usually are not required to file Form 940, Employer’s Annual Federal Unemployment Tax return. However, check your local and state government requirements. You may be required to file Unemployment Tax Forms for the local or state government.
Annual Submissions
At the end of the year all employers must submit an IRS Form W-3, “Transmittal of Wage and Tax Statement” for each employee. Form W-3 is used to forward the original of the W-2 “Wage and Tax Statement” to the Social Security Administration. Be aware this form is compared to all Form 941s which have been submitted and filed for the year. Any discrepancies will have to be resolved through the IRS.
Annual Preparation Of IRS Form W-2 “Wage And Tax Statement”
- Recording salary and housing allowance. The following boxes on the W2 form are to be filled out as follows:
- Boxes B and C are for the employer’s information.
- Boxes A and E are for the employee’s information.
- Box 1 is for the income subject to Federal Income Tax.
- Box 2 is for the Federal Tax withheld.
- Boxes 3 and 5 are for the income subject to FICA and Medicare taxes, including the housing allowance.
- Box 14 is for listing the housing allowance included in Boxes 3 and 5.
AnnuallyIRS FORM 1099-MISC, Miscellaneous Income Form is filed for anyone who received over $600 during the year for providing services to the church